factum of the applicants - fti consultingcfcanada.fticonsulting.com/cashstorefinancial/docs/factum...

Court File No.

ONTARIO SUPERIOR COURT OF JUSTICE

(COMMERCIAL LIST)

IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT,

R.S.C. 1985, c. C-36, AS AMENDED

AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF THE CASH STORE FINANCIAL SERVICES INC., THE CASH STORE INC., TCS CASH STORE

INC., INSTALOANS INC., 7252331 CANADA INC., 5515433 MANITOBA INC., 1693926 ALBERTA LTD DOING BUSINESS AS “THE TITLE STORE”

APPLICANTS

FACTUM OF THE APPLICANTS

April 13, 2014 OSLER, HOSKIN & HARCOURT LLP

P.O. Box 50, 1 First Canadian Place Toronto, ON M5X 1B8

Marc Wasserman (LSUC#44066M) Tel: 416.862.4908 Email: [email protected]

Jeremy Dacks (LSUC#41851R) Tel: 416.862.4923 Email: [email protected] Counsel to the Special Committee of the Board of Directors of Cash Store Financial Services Inc.

TO: SERVICE LIST

Party/Counsel Telephone Facsimile Party Represented

FTI Consulting Canada Inc. TD Waterhouse Tower 79 Wellington Street West Suite 2010, P.O. Box 104 Toronto ON M4K 1G8 Greg Watson Email: [email protected] Jeff Rosenberg Email: [email protected]

416.649.8077 416.649.8101 Proposed Monitor

McCarthy Tétrault Suite 5300, TD Bank Tower Box 48, 66 Wellington Street West Toronto ON M5K 1E6

James Gage Email: [email protected]

Heather Meredith Email: [email protected]

416.362.1812

416.601.7539

416.601.8342

416. 868.0673

Counsel for the Proposed Monitor

Goodmans LLP Bay Adelaide Centre 333 Bay Street, Suite 3400 Toronto ON M5H 2S7 Robert J. Chadwick Email: [email protected]

Brendan O’Neill Email: [email protected]

416. 979.2211

416.597.4285

416.849.6017

416. 979.1234

Counsel for Ad Hoc Noteholders

Norton Rose Fulbright Canada LLP Suite 3800, Royal Bank Plaza, South Tower 200 Bay Street, P.O. Box 84 Toronto, ON M5J 2Z4

Virginie Gauthier Email: [email protected]

Alex Schmitt Email: [email protected]

416.216.4000

416.216.4853

416.216.2419

416.216.3930 Counsel for Coliseum Capital Management

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Party/Counsel Telephone Facsimile Party Represented

Bennett Jones LLP 4500 Bankers Hall East 855 2nd Street SW Calgary, AB T2P 4K7

Grant Stapon Email: [email protected]

Kenneth Lenz Email: [email protected]

403.298.3100

403.298.3204

403.298.3317

403.265.7219 Counsel for McCann Family Holding Corporation

McMillan LLP Brookfield Place 181 Bay Street, Suite 4400 Toronto, ON M5J 2T3

Adam C. Maerov Email: [email protected]

Brett Harrison Email: [email protected]

403.531.4700

403.215.2752

416.865.7932

416.865.7048 Counsel for Trimor Annuity Focus LP #5

Computershare Trust Company of Canada and Computershare Trust Company, NA 100 University Avenue 9th Floor, North Tower Toronto, ON M5J 2Y1

Manager, Corporate Trust

Charles Eric Gauthier General Manager, Central Canada Email: [email protected]

416.263.9445

416.981.9777 Collateral Trustee under the Collateral Trust and Intercreditor Agreement

Borden Ladner Gervais Centennial Place, East Tower 1900, 520 – 3rd Ave SW Calgary, AB, T2P 0R3

Josef G.A. Kruger [email protected]

403.232.9500

403.232.9563

403.266.1395 Counsel to the Trustee in Bankruptcy for Assistive Financial Corp.

LEGAL_1:30278650.2

Court File No.

ONTARIO SUPERIOR COURT OF JUSTICE

COMMERCIAL LIST

IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C., 1985, c. C-36, AS AMENDED

AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF THE CASH STORE FINANCIAL SERVICES INC., THE CASH STORE INC., TCS CASH STORE INC., INSTALOANS INC., 7252331 CANADA IN., 5515433 MANITOBA INC., 1693926 ALBERTA LTD DOING BUSINESS AS “THE TITLE STORE”

APPLICANTS

______________________________________________________________________________


PART I – NATURE OF THIS APPLICATION

1. The Cash Store Financial Services Inc. (“Cash Store Financial”) and the other

applicants listed above (the “Applicants”) seek relief under the Companies’ Creditors

Arrangement Act, R.S.C. 1985, c. C-36, as amended (the “CCAA” or the “Act”).

2. The Applicants are seeking a stay of proceedings under the CCAA in order to

restructure their businesses (as described in the affidavit of Steven Carlstrom sworn on April 13,

2014 (the “Carlstrom Affidavit”)) with a view to emerging as a going concern in order to

continue providing valued services to their customers. In addition and in particular, the

Applicants seek to maintain employment for as many as possible of their approximately 1,840

employees in Canada and the UK (470 of which are in Ontario).1

1 Carlstrom Affidavit, paras. 5, 23 and 39.

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3. The stay of proceedings will provide the Applicants with the necessary

“breathing space” to allow them to carry out this restructuring, including to engage with their

major stakeholders to resolve their current financial difficulties. A restructuring of the

Applicants’ business – for example, through a transition to a new business model and/or a sale of

all or part of the business – will be in the interests of all stakeholders, including employees,

customers, landlords, class action plaintiffs, bondholders, third party lenders and other creditors.

Without this “breathing space”, it is very likely that Cash Store will face bankruptcy and

liquidation resulting in materially worse recoveries for all stakeholders.

4. The Applicants are seeking an initial stay of proceedings. Without such relief,

demands from secured and other significant creditors, the impact of ongoing litigation and

regulatory action, as well as other significant pressures on the operations of Cash Store, will

likely result in cessation of going concern operations, to the detriment of all stakeholders. Senior

Management has expressed the view that Cash Store can be a viable business once it undergoes

the restructuring process. It is therefore appropriate for this Court to grant the breathing space to

allow Cash Store to continue its exploration of strategic alternatives to maximize value for all

stakeholders, including continued discussion with stakeholders, with the assistance of the

proposed Monitor.2

5. References to “Cash Store” in this factum refer to all of the Applicants in this

proceeding.

2 See Carlstrom Affidavit, paras. 10 and 153.

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PART II – FACTS

6. The facts with respect to this Application are more fully set out in the Carlstrom

Affidavit. Capitalized terms in this Factum not otherwise defined have the same meanings as in

the Carlstrom Affidavit.

Overview of Cash Store’s Business 7. Cash Store is a leading provider of alternative financial products and services,

serving individuals (approximately 7 to 10 percent of Canadians) for whom traditional banking

may be either inconvenient or unavailable.3 Cash Store’s share of Canada’s $2.5 billion payday

lending market was, until recently, approximately 35 percent.4

8. Cash Store owns and operates Canada’s largest network of retail branches in the

alternative financial products and services industry, with 509 branches across Canada (located in

every province and Territory other than Quebec and Nunavut), as well as 27 branches in the

United Kingdom.5 The largest number of branches (176) is located in Ontario.6 Cash Store’s

branches are almost all located in facilities leased from third party landlords, as is Cash Store’s

corporate headquarters.7

9. Cash Store acts as both broker and lender of short-term advances, using a

combination of payday loans and lines of credit as its primary consumer lending offerings. It

3 Carlstrom Affidavit, paras. 3 and 28.

4 This number reflects the market share prior to Cash Store’s suspension of brokering activities in Ontario. See Carlstrom Affidavit, paras. 25 and 26. Further discussion of events in Ontario is found at paras. 93 to 102 of the Carlstrom Affidavit.

5 Carlstrom Affidavit, paras. 3, 35, 36, and 38. Cash Store operates its branches under several banners, including “Cash Store Financial”, “Instaloans”, and “The Title Store”.

6 Carlstrom Affidavit, para. 38.


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earns fees and interest income on these products.8 In FY 2013, Cash Store’s branches made over

1.3 million individual loans, and had a customer satisfaction rating of 88% in Canada and 93% in

the UK.9

10. Cash Store offers a wide range of financial products and services such as bank

accounts, prepaid MasterCard, private label credit and debit cards, cheque cashing, money

transfers, payment insurance and prepaid phone cards. A number of these products are offered by

means of arrangements with third party providers.10

Corporate Structure 11. Cash Store Financial is a publicly held Ontario Corporation that is listed on the

Toronto Stock Exchange. It was also listed on the New York Stock Exchange (“NYSE”) until its

voluntary de-listing on February 28, 2014. The other Applicants are all privately held

corporations that are direct or indirect subsidiaries of Cash Store Financial.11

12. The main active subsidiaries of Cash Store Financial are The Cash Store Inc. and

Instaloans Inc., which act as both lenders and/or brokers, operating in all of the Canadian

provinces and territories in which Cash Store has a presence. The other Canadian subsidiaries

include: (a) 1693926 Alberta Ltd., which operates “The Title Store” and offers loans secured by

a motor vehicle as collateral (not an Applicant in these proceedings); (b) TCS-Cash Store, the

lessee for all of the leased corporate stores; and (c) 5515433 Manitoba Inc., which holds property

in Manitoba and acts as landlord for two Manitoba corporate stores. Certain other subsidiaries





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are essentially inactive, including The Cash Store Financing Corporation and 1677547 Alberta

Ltd. (neither of which is an Applicant in these proceedings), and 7252331 Canada Inc., which

formerly acted as a direct payday lender and as lender for the Elite Line of Credit in British

Columbia, and currently holds certain receivables.12

13. The Applicants include three companies that are incorporated and operate in the

United Kingdom. These companies include: The Cash Store Financial Limited (a holding

company) and its subsidiaries, The Cash Store Limited (a lender) and CSF Insurance Services

Limited (a service provider). At this stage, these three UK companies are not Applicants in this

proceeding. However, Cash Store may seek to add them to this proceeding in the future, if

circumstances warrant it.13 In addition, Cash Store Financial holds certain equity interests in

foreign operations in Australia and the UK.14

14. Cash Store operates a central cash management system, including all bank

reconciliations, all accounts payable and payroll (with the exception of the UK corporations,

which process their own accounts payable and payroll). Cash is transferred between legal entities

and bank accounts, as necessary, on a daily basis. In particular, as discussed further below, the

bank accounts do not segregate the cash belonging to each subsidiary into Unrestricted and

Restricted Cash (as these concepts are defined below).15





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Direct Lending Business 15. Cash Store operates under two major business models: the direct lending

business and the brokered lending business. Cash Store acts as a direct payday lender (as

opposed to a broker) in Alberta, British Columbia, Nova Scotia, and Saskatchewan. It also

formerly acted as a direct lender in Manitoba and Ontario, until it switched to offering line of

credit products in those jurisdictions.16

16. In its direct lending business, Cash Store is the lender and typically arranges for

advances to consumers that range from $100 to $1,500. To qualify, the customer provides proof

of income, copies of recent bank statements, current proof of residence and current telephone and

utility bills. The customer must then either write a cheque or execute a pre-authorized debit

agreement for the amount of the loan plus loan fees.

17. Cash Store generally obtains payment either by processing the pre-authorized

debit or cashing the cheque on the due date of the loan. The due date is generally the customer’s

next payday, but is never more than 62 days from the date of the advance, in accordance with

regulatory requirements.17

Brokered Lending Business 18. In the other provinces where Cash Store carries on its lending business (New

Brunswick, Newfoundland, Northwest Territories, Prince Edward Island and the Yukon

Territory), Cash Store acts as a broker or intermediary on behalf of the customers, with third

party lenders (“TPLs”) acting as lenders. If the customer’s eligibility for a loan is established

(which involves similar requirements to those that apply in the direct lending business), the

16 Carlstrom Affidavit, para. 31. The line of credit product is no longer offered in Ontario due to regulatory issues

discussed further below.


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customer completes the TPL’s loan documentation and Cash Store makes the advance on behalf

of the TPL.18

19. Brokered loans are repaid to Cash Store in accordance with their terms. Upon

repayment, funds are either remitted to the TPL, or more frequently, maintained in Cash Store’s

operating bank account until redeployed to new borrowers.19

20. Cash Store earns fees on brokered loan transactions.20

21. The brokerage model has also been applied in Ontario and Manitoba on slightly

different basis. In those jurisdictions, the traditional payday loans product was replaced in

October 2012 and February 2013, respectively, by a traditional, unsecured, medium term

revolving line of credit, with regular minimum payments tailored to customer needs and profiles.

All of the line of credit products are brokered, except a small number of Cash Store’s “Elite”

lines of credit which are no longer offered as of March 2014. TPLs also provide the funding for

the brokered line of credit products, which are then arranged by Cash Store in exchange for fees.

Proceeds from brokered line of credit products are handled in the same way as the proceeds from

other brokered loans.21

22. As of February 12, 2014, however, the brokered line of credit product was

discontinued in Ontario and no lending activity is currently occurring in Ontario due to





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outstanding issues (discussed further below) regarding compliance with regulatory

requirements.22

Financial Position of Cash Store 23. Based on its interim financial statements, as of December 31, 2013, Cash Store

had total assets of $176,255,000 and total liabilities of approximately $184,984,000.23

Indebtedness under Credit Facilities 24. Of the liabilities described above, approximately $139.5 million represents long-

term debt. This debt is principally composed of two amounts: $12 million owing to the Senior

Secured Lenders under the Credit Agreement (described below) and $127.5 million owing to the

Senior Secured Noteholders (also discussed below).24

25. On November 29, 2013, Cash Store entered into a credit agreement (the “Credit

Agreement”) with Coliseum Capital Management, LLC, 8028702 Canada Inc. and 424187

Alberta Ltd. (collectively, the “Senior Secured Lenders”). Pursuant to the Credit Agreement, the

Senior Secured Lenders have provided $12 million of secured loans. These loans are guaranteed

by certain Cash Store affiliates (the “Guarantors”).25 The loans made under the Credit Agreement

mature on November 29, 2016, subject to certain requirements to repay pro rata amounts prior to

maturity to the extent that the amount outstanding exceeds the borrowing base.26

22 Carlstrom Affidavit, para. 34. See also Carlstrom Affidavit, paras. 93 to 102.

23 Carlstrom Affidavit, paras. 45 and 52. More detailed financial information is contained in the Carlstrom Affidavit at paras. 44 to 54. See also Exhibits A and B to the Carlstrom Affidavit.


25 Carlstrom Affidavit, para. 59. See also Exhibit C to the Carlstrom Affidavit.


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26. The loans made under the Credit Agreement are designated as priority lien debt.

The security interest of the Senior Secured Lenders ranks ahead of the security interest in Cash

Store’s property granted in favour of the Senior Secured Noteholders (described below).27 Upon

default, the Senior Secured Lenders have the right, inter alia, to accelerate the obligations under

the Credit Agreement and to realize upon the security.28 As of March 2014, Cash Store had

breached a number of covenants under the Credit Agreement, including the obligation to pay

interest when due on March 29, 2014. Such breaches either already constitute defaults or will

constitute defaults with the passage of time. Cash Store has sought a waiver of these defaults

from the Secured Secured Lenders, who have not responded to date.29

27. In January 2012, Cash Store Financial completed a private placement of $132.5

million of 11.5% senior secured notes (the “Notes”) under a note indenture (the “Note

Indenture”) and applied the proceeds to acquiring a portfolio of consumer loans from third party

lenders and to settle certain pre-existing relationships with TPLs.30 The Notes are recorded at a

discount ($127.5 million) to their face value and accreted to the par value over the five year term

using the effective interest rate method.31

28. The Notes mature on January 31, 2017. The Notes are guaranteed by the same

Guarantors that guaranteed the loans under the Credit Agreement. The Notes are secured on a

second-priority basis by liens on all of Cash Store Financial’s and its restricted subsidiaries’

existing and future property, subject to certain exceptions. The amounts owing to the noteholders

27 Carlstrom Affidavit, para. 64 and Exhibit E.



30 Carlstrom Affidavit, paras. 31, 69 and 70. See also Exhibit F to the Carlstrom Affidavit.


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(the “Senior Secured Noteholders”) are subordinated to the amounts owing to the Senior Secured

Lenders, which are secured by a first priority lien on the same property.32

29. Upon commencement of the CCAA proceeding, Cash Store will no longer be in

compliance with the covenants in the Note Indenture and the full $139.5 million in long term

debt will become immediately due and payable. Cash Store does not have the ability to repay the

Notes at this time.33

Relationship with theTPLs 30. In connection with its brokered lending business, Cash Store is a party to a

number of agreements with the TPLs (the “Broker Agreements”). Under the Broker Agreements,

Cash Store earns fees for brokering loan transactions between the TPLs as lender and the

customer.34

a. “Restricted Cash” 31. Cash Store has received approximately $42 million from the TPLs (the “TPL

Funds”). Pursuant to the terms of the Broker Agreements, these funds are contractually required

to be used only for the purpose of lending to customers.35 TPL Funds that are not loaned to

customers are held in Cash Store’s bank accounts and are designated, for accounting purposes, as

“Restricted Cash”. Despite its nomenclature, “Restricted Cash” does not represent a segregated

fund and is simply an accounting concept. Essentially, “Restricted Cash” is a notional amount

that represents the difference between the amount of TPL Funds provided to Cash Store for



34 Carlstrom Affidavit, para. 76 and Exhibits G to K.

35 Carlstrom Affidavit, para. 78. See also Exhibits G to K of the Carlstrom Affidavit.

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brokered loans to consumers, and the amount of the outstanding brokered loans made with the

TPL Funds that have not yet been repaid, together with cumulative losses.36 All other cash held

by Cash Store is accounted for as “Unrestricted Cash”.37

32. Although the Broker Agreements permit the TPLs to require Cash Store to hold

the TPL Funds in a specifically designated account, no TPL has ever exercised its contractual

right to require Cash Store to do so (until two TPLs recently and belatedly purported to do so, as

described further below). As a result, when TPL Funds are provided by the TPLs, no separate

bank account for TPL Funds is, or is required to be, maintained.38

33. Moreover, amounts received by Cash Store from borrowers in payment for

indebtedness under both direct payday loans and brokered loans funded with TPL Funds are co-

mingled in Cash Store’s general bank accounts. Until month end, it is not possible to know

which dollars represent Restricted Cash and which represent Unrestricted Cash.39 Repayments

received on brokered loans are intended to replenish the source of funds for further brokered

lending, and to be redeployed as further brokered loans to customers. These are the amounts that

are described for accounting purposes as “Restricted Cash”.40

34. In order to ensure that Cash Store always knows how much cash that Cash Store

is contractually entitled to allocate for additional brokered loans – and how much cash could be

subject to a demand for repayment by the TPLs under the terms of the Broker Agreement -- Cash






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Store keeps detailed records of the amount of Restricted Cash held. Month end reconciliations

are generally completed within approximately ten days after month end.41

b. “Voluntary Retention Measures” 35. Cash Store has historically taken two types of voluntary measures (not required

under the Broker Agreements) to protect the TPLs, to support their “investment” in Cash Store’s

business and to encourage the TPLs to continue funding the brokered loans. The first of these

measures consists of monthly cash retention payments, which combined with portfolio returns,

give the TPLs an effective return of 17.5% interest on their “investment” per year (the “Monthly

Lender Distribution”).42

36. The second type of measure can be loosely described as “capital protection” (the

“Capital Protection Measures”). These measures are generally designed to protect the TPLs

against losses associated with unpaid broker loans. The Capital Protection Measures include both

an “expensing mechanism” and a “purchasing mechanism.”

(a) Using the “expensing mechanism”, if a loan remains unpaid after 90 days, Cash

Store will, by means of a book entry, credit the TPL with a retention payment in

the amount of the loss. This payment is recorded as an expense on Cash Store’s

balance sheet, and does not involve any transfer of cash to the TPLs. As a result

of this credit and corresponding book entry, the Restricted Cash balance

increases, and the Unrestricted Cash balance goes down.



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(b) The “purchasing mechanism” is used in Ontario and Manitoba as an alternative to

the expensing mechanism. Cash Store purchases past due brokered loans from the

TPLs at face value and recognizes the difference between the purchase price and

the fair value of the loans as a retention payment. Cash Store is then able to take

collection measures for these past due loans without having to be licensed as a

collection agency or to engage a third party collection agency.43

37. Neither the Monthly Lender Distribution nor the Capital Protection Measures are

contractually required under the terms of the Broker Agreements. In fact, the Broker Agreements

do not guarantee any specific rate of return to the TPLs on the TPL Funds provided to Cash

Store. Moreover, subject to certain specific exceptions, the Broker Agreements contemplate that

TPL and not Cash Store will bear the risk of loss on the brokered loans.44

38. Given that neither the Monthly Lender Distributions, nor the Capital Protection

Measures are contractually required, Cash Store did not make the Monthly Lender Distribution

and did not implement either of the Capital Protection Measures in March 2014. The extent to

which Cash Store will make the Monthly Lender Distributions during the post-filing period is

currently being resolved. At the time of drafting, it is proposed that the Monthly Lender

Distributions will be made only on the pool of Restricted Cash representing post-filing payments

from borrowers actually received by Cash Store which is available for redeployment to future

borrowers. The Monthly Lender Distribution will not be made on the full amount of the TPL

Funds received, as has been the historic practice, or on the amount of funds represented by loans

currently outstanding to borrowers.



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c. Transfer of Receivables to “Free Up” Restricted Cash 39. On several occasions, the month end reconciliation has revealed that the amount

of Restricted Cash held by Cash Store exceeds its total cash, meaning that Cash Store has used

the Restricted Cash to fund its intra-month working capital needs. Cash Store has then

transferred its own loan receivables from its direct lending portfolio to the TPLs to “free up” the

Restricted Cash by reducing the Restricted Cash balance, together with an additional amount to

permit Cash Store to meet its working capital needs during the next month with Unrestricted

Cash. This practice is referred to in this factum as the “Receivable Transfers.” Like the Capital

Protection Measures, the Receivable Transfers are not required under the Broker Agreements,

but they are permitted. They are permitted under the Credit Agreement and the Note Indenture,

as long as they are made in the ordinary course of business.45

40. Cash Store will not continue to make the Receivables Transfers during the post-

filing period. The Receivables Transfers will be rendered unnecessary by the proposed

accounting measures to be implemented by Cash Store after the filing.

Urgent Need for Relief 41. This application for relief under the CCAA is being brought on an urgent basis

due to the confluence of a number of factors that have put extreme pressure on the continued

ability of Cash Store to operate as a going concern. The situation is currently described as

“dire”.46

42. These factors include:



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(a) Cash Store currently faces numerous regulatory challenges, arising in part out of

the relatively recent introduction of payday loan legislation in certain jurisdictions

and the transition generally from an unregulated market to a regulated market.

These regulatory issues have impacted Cash Store’s ability to design one business

model for its payday lending business across Canada and exposed Cash Store to

increased costs associated with adjusting Cash Store’s business model to respond

to regulatory change.47

(b) Cash Store has encountered specific regulatory issues in relation to its lending

business in Ontario and its inability to secure a license as a payday lender under

applicable Ontario legislation. An appeal is underway of an Ontario Superior

Court of Justice decision that held that Cash Store could not offer its line of credit

products in Ontario without a payday lender license. At the current time, Cash

Store is receiving payment for outstanding loans, but cannot sell any new payday

loan products in Ontario, to the significant detriment of Cash Store’s overall

business. Although Cash Store’s Ontario branches are still open, Cash Store has

begun implementing a temporary lay-off of approximately 250 Ontario

employees. If Ontario branches are ultimately closed as part of the restructuring,

severance costs for some or all of the approximately 470 Ontario employees will

be significant.48

(c) The regulatory environment is in flux. New regulatory initiatives are being

contemplated at both the federal and provincial levels that could further impact

47 Carlstrom Affidavit, paras. 88 to 92.


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aspects of Cash Store’s business, such as title loans and the lines of credit offered

in Manitoba.49 Cash Store has also recently been subject to regulatory action in

British Columbia and Manitoba and to a criminal investigation in

Newfoundland.50 Regulatory issues have also arisen in Nova Scotia and New

Brunswick.51

(d) In addition, Cash Store is defending a number of significant legal proceedings

across Canada and the United States. These proceedings include class actions

regarding its business model (primarily involving fees and interest rates charged)

and regarding its compliance with securities laws. These proceedings have

exposed Cash Store to significantly increased legal costs. The magnitude of any

ultimate liability of Cash Store in much of this litigation is difficult to estimate.52

Cash Store is also subject to additional liabilities in connection with a class action

settlement in British Columbia.53

(e) Cash Store has recently incurred significant expenses for audit and special

investigation fees associated with questions about the acquisition of the consumer

loan portfolio from the TPLs in 2012.54

49 Carlstrom Affidavit, paras. 98, 103, 106 to 107.

50 Carlstrom Affidavit, paras. 104 to 106, 108 to 109, 110.


52 Carlstrom Affidavit, paras. 114, 115 to 123. Note that Cash Store has entered into an agreement in principle to settle four outstanding securities class actions: Carlstrom Affidavit, paras. 122 and 123.



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(f) Due to Cash Store’s inability to comply with the NYSE’s market capitalization

and share price requirements, Cash Store voluntarily de-listed its stock from the

NYSE.55

(g) Cash Store does not have the cash to continue to operate. As of February 28,

2014, there was $12.2 million in Restricted Cash available for consumer lending.

Since Cash Store has been receiving repayments of brokered loans in Ontario and

not re-lending, the amount of Restricted Cash has increased dramatically. Final

accounting for March 2014 has not yet been completed. However, it is estimated

that Restricted Cash now totals approximately $14.4 million and exceeds the

amount of total cash in Cash Store’s bank accounts.56

(h) Two of the TPLs (“McCann” and “Trimor”) have requested the return of the

Restricted Cash. Under the Broker Agreements, these “redemption” requests must

be addressed by May 23, 2014 and June 26, 2014, respectively. Cash Store

currently does not have the liquidity to honour these requests. Trimor has signed a

non-disclosure agreement (“NDA”) and been participating in discussions with

Cash Store and the Special Committee. McCann has not agreed to sign an NDA,

and has asserted that the Restricted Cash is held on trust, despite the lack of any

trust language or other indicia of an intention to create a trust in the Broker

Agreements (as discussed further below). Cash Store has disputed this contention.

Efforts to resolve this issue have, to date, not borne fruit. On April 11, 2014,

McCann commenced litigation against Cash Store seeking injunctive relief



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against Cash Store in relation to the TPL Funds and asserting a trust over such

funds.57

Restructuring Efforts to Date 43. Cash Store requests relief in this proceeding in order to achieve the necessary

“breathing space” to restructure its business. Although the exact nature of the restructuring is not

yet resolved, Cash Store has already undertaken a number of steps towards such a restructuring:

(a) Cash Store established a Special Committee of its Board of Directors (the

“Special Committee”) on February 19, 2014, advised by its own legal counsel and

financial advisors (“Rothschild”), in order to explore options for a sale,

restructuring, refinancing or liquidation.58

(b) Cash Store hired a Compliance and Regulatory Affairs Officer, reporting directly

to the Special Committee, in order to address issues of regulatory compliance and

establish more productive relationships with applicable regulators. Priority is

being given to the resolution of regulatory issues in Ontario.59

(c) Rothschild has commenced efforts to canvas interest in a sale or investment

transaction. As of the date of filing, a number of parties have entered into non-

disclosure agreements and begun due diligence of Cash Store.60





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PART III – ISSUES AND THE LAW

44. The issues on this Application are as follows:

(a) are the Applicants insolvent?;

(b) are the Applicants permitted to use existing cash on hand to meet their operating

capital requirements during the post-filing period?;

(c) does this Honourable Court have jurisdiction to grant a DIP financing charge on a

priority basis over the property of the Applicants and, if so, should the Court

exercise its discretion to do so?;

(d) does this Honourable Court have jurisdiction to grant an order entitling the

Applicants to make pre-filing payments to critical suppliers and, if so, should the

Court exercise its jurisdiction to do so?;

(e) should this Honourable Court exercise its discretion to grant the Applicants’

Administration and Directors’ Charges (both as defined below); and

(f) should this Honourable Court grant protection to the Chief Restructuring Officer

(“CRO”) and to the Special Committee on the basis that the Special Committee

has been fulfilling the role of CRO and will continue to fulfill this role in these

proceedings in the very brief period until the CRO’s appointment formally takes

effect?

A. THE APPLICANTS ARE COMPANIES TO WHICH THE CCAA APPLIES

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45. The CCAA applies to a “debtor company” or affiliated debtor companies where

the total of claims against the debtor or its affiliates exceeds five million dollars. Pursuant to

section 2 of the CCAA, a “debtor company” means, inter alia, a company that is insolvent.61

46. Until recently, it was common practice to refer to the definition of “insolvent

person” in the Bankruptcy and Insolvency Act (“BIA”) in order to establish that an applicant is a

“debtor company” in the context of the CCAA. The definition of “insolvent person” in the BIA

is as follows:

s.2(1)

… “insolvent person” means a person who is not bankrupt and who resides, carries on business or has property in Canada, whose liabilities to creditors provable as claims under this Act amount to one thousand dollars, and

(a) who is for any reason unable to meet his obligations as they generally become due,

(b) who has ceased paying his current obligations in the ordinary course of business as they generally become due, or

(c) the aggregate of whose property is not, at a fair valuation, sufficient, or if disposed of at a fairly conducted sale under legal process, would not be sufficient to enable payment of all his obligations, due and accruing due;

47. In Re Stelco Inc.62, however, Farley J. held that the test for “insolvency” should

be given an expanded meaning under the CCAA in order to give effect to the rehabilitative goal

of the Act. The Court in that case concluded that it would defeat the purpose of the CCAA to

limit or prevent a CCAA application until the financial difficulties of the applicant are so

advanced that the applicant would not have sufficient financial resources to successfully

complete its restructuring. Under the Stelco approach, a Court will determine whether there is a

reasonably foreseeable expectation at the time of filing that there is a looming liquidity crisis that

61 CCAA, sections 2 and 3(1).

62 (2004), 48 C.B.R. (4th) 299, 2004 CarswellOnt 1211 (Ont. S.C.J. [Commercial List]), leave to appeal to C.A. refused 2004 CarswellOnt 2936 (Ont. C.A.), leave to appeal to S.C.C. refused 2004 CarswellOnt 5200 (S.C.C.).

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will result in the applicant running out of money to pay its debts as they generally become due in

the future without the benefit of a stay of proceedings. Put another way, an applicant does not

necessarily need to be balance sheet insolvent to qualify as a “debtor company” under the

CCAA. As Farley J. wrote:

It seems to me that the CCAA test of insolvency advocated by Stelco and which I have determined is a proper interpretation is that the BIA definition of (a), (b) or (c) of insolvent person is acceptable with the caveat that as to (a), a financially troubled corporation is insolvent if it is reasonably expected to run out of liquidity within reasonable proximity of time as compared with the time reasonably required to implement a restructuring. 63 [Emphasis added.]

48. The Applicants are all affiliated debtor companies with total claims against them

exceeding $5 million. Moreover, the Applicants are insolvent.64

49. Moreover, the Applicants are facing a significant liquidity crisis, exacerbated by

(among other things) the regulatory issues in Ontario. Cash Store’s liquidity has deteriorated

significantly over recent months and is continuing to do so. Senior Management and the Special

Committee have expressed concerns regarding the degree of uncertainty, and the number of

business and legal impediments to continuing the exploration of strategic alternatives for Cash

Store’s business outside an insolvency proceeding.65

50. Cash Store’s liquidity has declined from $13.1 million of total cash at the end of

February to $12.6 million at the end of March, and is projected to decline significantly to

approximately $5 million at the end of April. These cash balances include so-called Restricted

63 Re Stelco, supra, at para. 26.

64 Carlstrom Affidavit, paras. 1 and 8. See Re First Leaside Wealth Management Inc., 2012 ONSC 1299, 2012 CarswellOnt 2559 (Ont. S.C.J. [Commerical List]) at paras. 23 to 31 for the proposition that not all companies within a corporate group need to be insolvent in order to benefit from an initial order.


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Cash. Cash Store’s business depends on its ability to lend. As such, it requires a minimum of $5

to $10 million to manage ordinary day-to-day fluctuations in its lending activities.66

51. As of March 31, 2014, Cash Store had defaulted under several covenants in the

Credit Agreement, entitling the Senior Secured Lenders to accelerate the obligations under the

Credit Agreement and enforce their security. Cash Store does not have the funds to repay the

Senior Secured Lenders.67 Upon commencement of the CCAA proceeding, Cash Store will no

longer be in compliance with the Note Indenture, and this portion of its long-term debt will also

become immediately due and payable. It goes without saying that Cash Store does not have the

funds to repay the Notes at this time.68

52. Cash Store is likely insolvent under the BIA test, as it is currently unable to meet

its liabilities as they come due.69 In any event, all of the above factors indicate that Cash Store

faces exactly the type of “looming liquidity crisis” that was held in Stelco to satisfy the test for

insolvency under the CCAA.

C. USE OF EXISTING CASH ON HAND

53. Cash Store’s cash flows depend on its ability, during the post-filing period when

the stay of proceedings is in effect, to use its cash on hand as of the date of filing (the “Existing

Cash”) for its operating capital requirements, even though so-called Restricted Cash exceeds

Cash Store’s total cash. Moreover, the proposed DIP Facility (described below) currently





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contemplates that Cash Store should have access to the Existing Cash for general operating

purposes.

54. The TPLs have challenged Cash Store’s ability to use Restricted Cash for

anything other than the permitted purposes under the Broker Agreements. McCann has initiated a

legal proceeding seeking, among other things, injunctive relief and declaratory orders on the

basis that the Restricted Cash is held on trust for the TPLs.70 If the Initial Order is granted, this

proceeding will be stayed.

55. The requirements to establish an express trust are well-established and well-

known. It is necessary to demonstrate the existence of the “three certainties”. These are: certainty

of intention; certainty of subject-matter (or trust property); and certainty of objects

(beneficiaries). In order to demonstrate certainty of intention to create a trust, it is not necessary

to use any particular technical words. However, the intention must be clear.71 Generally, the

requirement is for the settlor of the so-called “trust” to use the words “in trust” or “as trustee

for”, although these words are not always indispensable.72 Given the consequences for the

recoveries of the Senior Secured Lenders and the Senior Secured Noteholders of a finding that

the TPL Funds or the Restricted Cash are subject to a trust, it is particularly important in the

context of these proceedings to find a clear intention to create a trust.

56. Cash Store strongly opposes any allegation that the TPL Funds or the Restricted

Cash – and therefore some or all of the Existing Cash -- are subject to any trust obligations.

Cash Store submits that the actions by the TPLs to belatedly assert trust obligations in this


71 D.W.M. Waters, Law of Trusts in Canada, 4th ed. (Toronto: Carswell, 2012) at pp. 140 to 141 [Waters].

72 Waters, supra, at p. 144.

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context are a blatant attempt to obtain an unjustified priority over the Senior Secured Lenders

and the Senior Secured Noteholders. If the TPLs had intended to impose trust obligations in

relation to the TPL Funds or the Restricted Cash, they are sophisticated parties who could easily

have done so. Moreover, if they had wanted any security over Cash Store’s obligations to repay

TPL Funds or Restricted Cash pursuant to the terms of the Broker Agreements, they could easily

have negotiated such protections.

57. There are five Broker Agreements in place with TPLs.73 These Broker

Agreements are in similar form and contain similar terms. It is submitted that there is a complete

absence of any indication in the Broker Agreements that the TPL Funds, or the Restricted Cash,

were intended to be held on any type of trust for the benefit of the TPLs.

58. There is no language whatsoever in any of the Broker Agreements that purports

to create an express trust over the TPL Funds when they are received by Cash Store, or over the

Restricted Cash (i.e. the payments received by Cash Store for indebtedness under brokered

loans). Nowhere, with the exception of one agreement, is the word “trust” even used.

59. The Omni Agreement states that a limited trust obligation does apply, but only

when a customer defaults. In those circumstances (and only those circumstances), Cash Store is

expressly required to hold 70% of collected amounts in trust.74 The presence of this limited trust

language, in contrast to the complete silence in the Broker Agreements regarding any other

intention to create a trust, is convincing evidence that if the parties had intended to create a trust

73 These Agreements include: Broker Agreement with Omni Ventures Ltd. dated January 31, 2012 (“Omni

Agreement”); Broker Agreement with L-Gen Management Inc. dated January 31, 2012 (“L-Gen Agreement”); Broker Agreement with 1396309 Alberta Ltd. dated January 31, 2012 (“Numberco Agreement”); Broker Agreement with TriMor Annuity Focus Limited Partnership dated February 1, 2012, as amended April 17, 2013 (“TriMor Agreement”) and Broker Agreement with McCann Family Holding Corporation dated June 19, 2012 (“McCann Agreement”). See Exhibits G to K to Carlstrom Affidavit.

74 Omni Agreement, section 7.2.

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obligation in relation to the TPL Funds or the Restricted Cash, they were more than capable of

doing so – and they did do so when they wanted to. There is no legal basis for reading in any

additional trust obligations.

60. Cash Store submits that the terms of and the historic practices under the Broker

Agreements – for example, the payment of the Monthly Lender Distributions, the absence of any

requirement to “flow through” funds received from borrowers in payment of brokered loans to

the TPLs, and the fact that the TPL Funds and Restricted Cash are not required to be segregated

from Cash Store’s general operating cash – are entirely inconsistent with the existence of trust

obligations.75 Cash Store’s public disclosures also do not indicate that the TPL Funds are subject

to any trust obligation.76 Use of Cash Store’s Existing Cash, even if some or all of it is Restricted

Cash, is not a “dissipation” of trust funds, contrary to the allegations of one TPL.77 It is clear that

no trust exists over either the TPL Funds or the Restricted Cash.

61. As soon as Restricted Cash is received in repayment of a brokered loan, it is

immediately commingled with all of Cash Store’s Unrestricted Cash. The TPLs have the

contractual right under the Broker Agreements to require Cash Store to hold TPL Funds in a

designated account. To date, the TPLs have not exercised this contractual right, with the

exception of their belated requests that accompany recent demands for the return of the TPL

Funds by the TPLs.78 In any event, any requirement to keep track of TPL Funds or Restricted

Cash through separate accounts cannot change the correct characterization under the Broker





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Agreements of the TPL Funds and the Restricted Cash and miraculously transform them into

trust funds, if they do not already have the characteristics of trust funds.

62. Cash Store’s position is that either the Broker Agreements create an unsecured

debt in the amount of the TPL Funds, or the TPL Funds are provided to Cash Store as an equity

investment in the business. At best, the TPL Funds were advanced as an interest-free loan,

subject to a contractual requirement to use those funds for a particular purpose. Any failure by

Cash Store to comply with the use requirement, with a request to create a designated account, or

with a demand for repayment of the TPL Funds may therefore be a breach of contract, which if

proven, would give rise to an unsecured damages claim.

63. Since the TPLs do not hold any security for repayment of the TPL Funds, the

TPLs are in no better or worse position than any other unsecured creditor whose claims will go

unpaid during the stay period, contrary to the terms of the debtor’s agreement with that creditor.

In fact, if Cash Store were to repay TPL Funds at this point, or accede to the request to create a

designated account with a view to bolstering a trust claim, such conduct could, in light of Cash

Store’s current financial difficulties, constitute a transfer at undervalue or preference.

64. Given that these matters are the subject of a dispute between the parties that

cannot be resolved either through negotiation or court order prior to the granting of the Initial

Order, the Initial Order will contain protections for the TPLs, including a charge in favour of the

TPLs (the “TPL Charge”) in the amount of the Existing Cash that will rank pari passu with the

proposed DIP Lender’s Charge (defined below). The exact terms of these TPL protections is

unresolved at the time of drafting and is subject to further negotiation. However, the TPL Charge

will not be enforceable unless and until it is determined that some or all of the Existing Cash is

trust money.

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65. The objective is to ensure that Cash Store has the immediate right to use the

Existing Cash, while protecting any future ability of the TPLs to assert that these funds are trust

money (a position that Cash Stores believes is without merit). Cash Store submits that these TPL

protections will avoid granting the TPLs more leverage in these proceedings than they are

entitled to have, given the terms of the Broker Agreements and the history of the relationship

with the TPLs.

D. JURISDICTION AND DISCRETION TO GRANT A DIP FINANCING CHARGE ON A PRIORITY BASIS

66. It is abundantly clear that Cash Store cannot restructure its business without

interim financing to allow it to continue to operate during the post-filing period while it

considers the best options to maximize recovery for all stakeholders.79

67. Subject to certain conditions, including the granting of the Initial Order,

Coliseum Capital Partners LP, Coliseum Capital Partners II, LP and Blackwell Partners LLC

have agreed to provide the Applicants with an interim financing facility (the “DIP Facility”) in

the amount of up to $20.5 million. The DIP Facility is intended to provide the Applicants with

adequate liquidity to satisfy their working capital requirements and to seek a complete

restructuring as part of a CCAA proceeding.80

68. At the time of drafting, the terms of the DIP Facility were subject to ongoing

negotiation. However, it is clear that the DIP Facility will be secured by a priority charge over

the assets of Cash Store (the “DIP Lender’s Charge”) that will rank ahead of existing security

interests, including the Senior Secured Lenders and the Senior Secured Noteholders, and pari



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passu with the TPL Charge. The DIP Lender’s Charge will rank behind the Administration

Charge and the Directors Charge (described below).

69. Section 11.2 of the CCAA gives the Court the statutory authority to grant a

debtor-in-possession (“DIP”) financing charge:

11.2(1) Interim Financing – On application by a debtor company and on notice to the secured creditors who are likely to be affected by the security or charge, a court may make an order declaring that all or part of the company’s property is subject to a security or charge – in an amount that the court considers appropriate – in favour of a person specified in the order who agrees to lend to the company an amount approved by the court as being required by the company, having regard to its cash-flow statement. The security or charge may not secure an obligation that exists before the order is made.

11.2(2) Priority – Secured Creditors – The court may order that the security or charge rank in priority over the claim of any secured creditor of the company.

…

70. Section 11.2(4) of the CCAA sets out the following factors to be considered by

the Court in deciding whether to grant a DIP financing charge:

11.2(4) Factors to be considered – In deciding whether to make an order, the court is to consider, among other things:

(a) the period during which the company is expected to be subject to proceedings under this Act;

(b) how the company’s business and financial affairs are to be managed during the proceedings;

(c) whether the company’s management has the confidence of its major creditors;

(d) whether the loan would enhance the prospects of a viable compromise or arrangement being made in respect of the company;

(e) the nature and value of the company’s property;

(f) whether any creditor would be materially prejudiced as a result of the security or charge; and

(g) the monitor’s report referred to in paragraph 23(1)(b), if any.

71. Before the above sections of the CCAA were enacted in 2009, it was well

established that courts could exercise their broad and flexible powers under the CCAA to

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approve DIP financing and provide that it be secured by a charge on the debtor company’s

assets, with priority, where appropriate, over prior security interests.81 The 2009 amendments to

the CCAA codify and clarify earlier practice but do not limit the court’s broad discretion to grant

orders that further a debtor’s overall restructuring objectives, including in respect of DIP

financing. As stated by Pepall J:

In no way do the amendments change or detract from the underlying purpose of the CCAA, namely to provide debtor companies with the opportunity to extract themselves from financial difficulties notwithstanding insolvency and to reorganize their affairs for the benefit of stakeholders. In my view, the amendments should be interpreted and applied with that objective in mind. 82

72. In Re Ted Leroy Trucking, the Supreme Court of Canada recently affirmed the

broad discretion of a CCAA court and the inherent flexibility of the statute in furtherance of the

CCAA’s overarching objective of facilitating the abilities of debtors to restructure their

businesses as going concerns.83

73. Any prejudice to existing creditors from a DIP Charge must be “material” in

order to weigh in the balance. Moreover, even if it can be established that some creditor is

materially prejudiced, this factor is only one factor to be considered in equal measure with the

others listed in s. 11.2(4) of the CCAA.84

81 Re Temple City Housing Inc. (2007), 42 C.B.R. (5th) 274, 2007 CarswellAlta 1806 (Alta. Q.B.) at para. 14,

leave to appeal to C.A. refused 2008 CarswellAlta 2 (Alta. C.A.); Skydome Corp. v. Ontario (1998), 16 C.B.R. (4th) 118, 1998 CarswellOnt 5922 (Ont. Gen. Div. [Commercial List]) at para. 9.

82 Re Canwest Global Communications Corp. (2009), 59 C.B.R. (5th) 72, 2009 CarswellOnt 6184 (Ont. S.C.J. [Commercial List]) at para. 24 [Re Canwest Global].

83 Re Ted Leroy Trucking [Century Services] Ltd., 2010 SCC 60, 2010 CarswellBC 3419 (S.C.C.) [Re Ted Leroy Trucking].

84 Re League Assets Corp., 2013 BCSC 2043, 2013 CarswellBC 3408 (B.C. S.C.) at para. 57.

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74. As noted above, pursuant to s. 11.2(1) of the CCAA (Interim financing), the DIP

Lender’s Charge may not secure an obligation that existed before the order was made. The

requested DIP Lender’s Charge will not secure any pre-filing obligations.

75. The following factors also support the granting of the DIP Lender’s Charge,

many of which incorporate the considerations enumerated in s. 11.2(4) above:

(a) the Cash Flow Forecast projects that the Applicants will require the additional

liquidity afforded by the DIP Facility in order to continue to operate through the

pendency of the proposed CCAA proceeding; 85

(b) the Applicants’ business is intended to continue to operate on a going concern

basis during this proceeding under the direction of Senior Management with the

assistance of the Applicants’ advisors and the proposed Monitor;

(c) it is anticipated that the DIP Facility will provide the Applicants with sufficient

liquidity to implement restructuring initiatives – such as a sales process and/or a

transition to a new business model -- which will materially enhance the likelihood

of a going concern outcome for the business of the Applicants;

(d) to the extent that the court, under the amended CCAA, must still weigh relative

prejudices in determining whether to grant the DIP Lender’s Charge, any

prejudice to secured creditors is minimal because the proposed DIP Lender is one

of the Senior Secured Lenders and one of the Senior Secured Noteholders;

moreover, the amount of the proposed DIP Facility is within the permitted

“basket” under the Note Indenture;

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(e) any prejudice to the secured creditors must be weighed against the stark reality

that the only alternative to a CCAA restructuring is a liquidation, which will

likely result in significantly worse recoveries, even for the secured creditors;

(f) the proposed DIP Lender has indicated that it will not provide a DIP Facility if the

DIP Lender’s Charge is not approved and the Initial Order is not approved in form

and substance satisfactory to the DIP Lender;

(g) the DIP Lender’s Charge will not secure any pre-filing obligations;

(h) secured creditors have either been given notice of the DIP Lender’s Charge, or are

not affected by it; and

(i) the Applicants anticipate that the proposed Monitor will file a report addressing

the DIP Facility, including the DIP Lender’s Charge.

76. Accordingly, the Applicants submit that this Honourable Court ought to grant the

DIP Lender’s Charge in the amount of up to $20.5 million and approve the DIP Credit

Agreement.

E. ENTITLEMENT TO MAKE PRE-FILING PAYMENTS TO CRITICAL SUPPLIERS

77. In the draft Initial Order the Applicants also seek authorization for Cash Store to

make, if necessary and with the consent of the Monitor, a limited amount of payments -- up to

$700K -- to critical suppliers, whether such obligations were incurred prior to or after the filing

date. Such payments are permitted under the proposed DIP Facility and contemplated in the Cash


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Flow Forecast. Cash Store is not requesting that a charge be granted to secure these payments,

nor is Cash Store seeking to have specific suppliers declared as “critical suppliers” at this stage.

78. There is ample authority supporting the Court’s general jurisdiction to permit the

payment of pre-filing obligations to persons whose services are deemed “critical” to the ongoing

operations of the debtor.86 Although the aim of the CCAA is to maintain the status quo while an

insolvent company attempts to negotiate a plan of arrangement with its creditors, the courts have

expressly acknowledged that preservation of the status quo does not necessarily entail the

preservation of the relative pre-stay debt status of each creditor:

The status quo is not always easy to find. It is difficult to freeze any ongoing business at a moment in time long enough to make an accurate picture of its financial condition. Such a picture is at best an artist’s view, more so if the real value of the business, including goodwill, is to be taken into account. Nor is the status quo easy to define. The preservation of the status quo cannot mean merely the preservation of the relative pre-stay debt status of each creditor. Other interests are served by the CCAA. Those of investors, employees, and landlords among them, and in the case of the Fraser Surrey terminal, the public too, not only of British Columbia, but also of the prairie provinces. The status quo is to be preserved in the sense that manoeuvres by creditors that would impair the financial position of the company while it attempts to reorganize are to be prevented, not in the sense that all creditors are to be treated equally or to be maintained at the same relative level. It is the company and all the interests its demise would affect that must be considered. 87

79. Section 11.4 of the CCAA, which was enacted as part of the 2009 amendments

to the CCAA, gives the Court the specific authority to declare a person to be a critical supplier

and to grant a charge on the debtor’s property in favour of such critical supplier.

11.4(1) Critical Supplier – On application by a debtor company and on notice to the secured creditors who are likely to be affected by the security or charge, the court may make an order declaring a person to be a critical supplier to the company if the court is satisfied that the person is a supplier of goods and services to the company and that the goods or services that are supplied are critical to the company’s continued operation.

86 See for example Re Smurfit-Stone Container Canada Inc. (2009), 50 C.B.R. (5th) 71, 2009 CarswellOnt 391

(Ont. S.C.J. [Commercial List]) at para. 21.

87 Re Alberta-Pacific Terminals Ltd. (1991), 8 C.B.R. (3d) 99, 1991 CarswellBC 494 (B.C. S.C.) at para. 23.

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11.4(2) Obligation to supply – If the court declares a person to be a critical supplier, the court may make an order requiring the person to supply any goods or services specified by the court to the company on any terms and conditions that are consistent with the supply relationship or that the court considers appropriate.

11.4(3) Security or charge in favour of critical supplier – If the court makes an order under subsection (2), the court shall, in the order, declare that all or part of the property of the company is subject to a security or charge in favour of the person declared to be a critical supplier, in an amount equal to the value of the goods or services supplied under the terms of the order.

11.4(4) Priority – The court may order that the security or charge rank in priority over the claim of any secured creditor of the company.

80. Significantly, section 11.4 does not oust the court’s inherent jurisdiction to make

provision for the payment of critical suppliers where no charge is requested.88 As noted by Pepall

J. in Re Canwest Global, the recent amendments, including under s. 11.4, do not detract from the

inherently flexible nature of the CCAA or the Court’s broad and inherent jurisdiction to make

such orders that will facilitate the debtor’s restructuring of its business as a going concern.89 This

inherent flexibility and the discretion of the Court to sanction measures not explicitly

contemplated by the CCAA was expressly affirmed by the Supreme Court of Canada in Re Ted

Leroy Trucking:

The general language of the CCAA should not be read as being restricted by the availability of more specific orders. However, the requirements of appropriateness, good faith, and due diligence are baseline considerations that a court should always bear in mind when exercising CCAA authority. Appropriateness under the CCAA is assessed by inquiring whether the order sought advances the policy objectives underlying the CCAA. The question is whether the order will usefully further efforts to achieve the remedial purpose of the CCAA – avoiding the social and economic losses resulting from liquidation of an insolvent company. I would add that appropriateness extends not only to the purpose of the order, but also to the means it employs. Courts should be mindful that chances for successful reorganizations are enhanced where

88 Re Canwest Publishing Inc./Publications Canwest Inc., 2010 ONSC 222, 2010 CarswellOnt 212 (Ont. S.C.J.

[Commercial List]) at para. 50 [Re Canwest Publishing].

89 Re Canwest Global, supra, at para. 24.

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participants achieve common ground and all stakeholders are treated as advantageously and fairly as the circumstances permit. 90 [Emphasis added.]

81. The requested authorization for Cash Store to make payments to certain critical

suppliers, if it is considered necessary to do so in order to facilitate the Applicant’s ongoing

restructuring efforts and where the Monitor consents, will give the Applicants the flexibility to

ensure that they maintain certain essential goods or services that are critical to the survival of

their business during the restructuring period. The Applicants submit that this provision is

appropriate in the circumstances and should be granted.

F. REQUESTED PRIORITY CHARGES

a. Administration Charge

82. Under the draft Initial Order, the Applicants are requesting that the Monitor,

along with its counsel, counsel and the financial advisor to the Special Committee, counsel to the

Applicants and counsel and the financial advisor to the DIP Lender be protected by a Court-

ordered charge on all of the present and future assets, property and undertaking of the Applicants

(the “Property) as security for their respective fees and disbursements (the “Administration

Charge”). The Administration Charge – the amount of which at time of drafting is currently

being worked out by the Applicants and the Monitor -- will have first priority over all other

charges.91

83. Prior to the 2009 amendment to the CCAA, administration charges were granted

pursuant to the inherent jurisdiction of the Court. Section 11.52 of the CCAA now expressly

provides that the Court has jurisdiction to grant an administration charge:

90 Re Ted Leroy Trucking, supra, at para. 70.

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11.52(1) Court may order security or charge to cover certain costs – On notice to the secured creditors who are likely to be affected by the security or charge, the court may make an order declaring that all or part of the property of a debtor company is subject to a security or charge – in an amount that the court considers appropriate – in respect of the fees and expenses of

(a) the monitor, including the fees and expenses of any financial, legal or other experts engaged by the monitor in the performance of the monitor’s duties;

(b) any financial, legal or other experts engaged by the company for the purpose of proceedings under this Act; and

(c) any financial, legal or other experts engaged by any other interested person if the court is satisfied that the security or charge is necessary for their effective participation in proceedings under this Act.

11.52(2) Priority – This court may order that the security or charge rank in priority over the claim of any secured creditor of the company.

84. This section is permissive, and does not contain any specific criteria for a court

to consider in granting such a charge.

85. In Re Canwest Global and Re Canwest Publishing, administration charges were

granted pursuant to s. 11.52(1). In Re Canwest Publishing, Pepall J. provided a non-exhaustive

list of factors to be considered in approving an administration charge, including:

(a) the size and complexity of the businesses being restructured;

(b) the proposed role of the beneficiaries of the charge;

(c) whether there is an unwarranted duplication of roles;

(d) whether the quantum of the proposed charge appears to be fair and reasonable;

(e) the position of the secured creditors likely to be affected by the charge; and

(f) the position of the Monitor.92

86. In this case, the restructuring is taking place in a shifting regulatory environment,

in circumstances where the Applicants are already subject to numerous regulatory, civil and


92 Re Canwest Publishing, supra, at para. 54.

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criminal actions, as well as demands from secured and other significant creditors, such as the

TPLs. For these reasons alone, the restructuring will be complex and will require the robust

involvement of a number of professional advisors. There is no unwarranted duplication of roles,

and any secured creditors likely to be affected by the Administration Charge have been provided

with advance notice.

87. The amount of the proposed Administration Charge will be established to be

commensurate with the complexity of the Applicants’ businesses and the tasks required to effect

a successful restructuring.

88. The Applicants submit that this is an appropriate circumstance for this

Honourable Court to grant the Administration Charge. Each of the professionals whose fees are

to be secured by the Administration Charge has played a critical role in the restructuring

activities to date and will continue to be instrumental to the Applicants’ restructuring activities

going forward. It is unlikely that the above-noted advisors will continue to participate in the

CCAA proceedings unless the Administration Charge is granted to secure their fees and

disbursements. The Applicants are working with the proposed Monitor to estimate the

appropriate size of the Administration Charge in view of the scope of the advisors’ mandates and

the anticipated complexity of the proceeding.

b. Directors’ Charge

89. The Applicants seek a directors’ and officers’ charge (the “Directors’ Charge”)

in an amount that is currently being negotiated. The Directors’ Charge would be secured by the

property of Cash Store and will rank behind the Administration Charge and ahead of the DIP

Lender’s Charge.

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90. The Directors’ Charge is essential to the successful restructuring of the

Applicants, which would not be possible without the continued participation of the Applicants’

experienced Board of Directors.93

91. Pursuant to s. 11.51 of the CCAA, the Court has specific authority to grant a

“super priority” charge to the directors and officers of a company as security for the indemnity

provided by the company in respect of certain statutory obligations.

11.51(1) Security or charge relating to director’s indemnification – On application by a debtor company and on notice to the secured creditors who are likely to be affected by the security or charge, the court may make an order declaring that all or part of the property of the company is subject to a security or charge – in an amount that the court considers appropriate – in favour of any director or officer of the company to indemnify the director or officer against obligations and liabilities that they may incur as a director or officer of the company after the commencement of proceedings under this Act.

11.51(2) Priority – The court may order that the security or charge rank in priority over the claim of any secured creditor of the company.

11.51(3) Restriction – indemnification insurance – The court may not make the order if in its opinion the company could obtain adequate indemnification insurance for the director or officer at a reasonable cost.

11.51(4) Negligence, misconduct or fault – The court shall make an order declaring that the security or charge does not apply in respect of a specific obligation or liability incurred by a director or officer if in its opinion the obligation or liability was incurred as a result of the director’s or officer’s gross negligence or wilful misconduct or, in Quebec, the director’s or officer’s gross or intentional fault.

92. This provision codifies the earlier practice of CCAA courts to grant directors’

and officers’ charges providing the directors and officers of debtors with additional protection

against liabilities that they could incur during the restructuring and reorganization of their

companies.94 As the Quebec Superior Court stated in Re JetsGo Corporation (citing Pamela L.J.


94 Re General Publishing Co. (2003), 39 C.B.R. (4th) 216, 2003 CarswellOnt 275 (Ont. S.C.J.) at para. 6, aff’d 2004 CarswellOnt 49 (Ont. C.A.)

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Huff and Line A. Rogers in the Commercial Insolvency Reporter), a directors and officers charge

reflects the specific risks to which these individuals are exposed in the event of an insolvency:95

Thus, against the backdrop of a potential business failure, a CCAA restructuring creates new risks and potential liabilities for another group of critical participants in an insolvency: the directors and officers of a debtor corporation.

93. In Re Canwest Global, Pepall J. provided guidance on some of the considerations

to be made by the court when applying s. 11.51. In approving the requested directors’ charge,

Pepall J. stated:

The purpose of such a charge is to keep the directors and officers in place during the restructuring by providing them with protections against liabilities they could incur during the restructuring: Re General Publishing Co. [(2003), 39 C.B.R. (4th) 216)]. Retaining the current directors and officers of the applicants would avoid destabilization and would assist in the restructuring. The proposed charge would enable the applicants to keep the experienced board of directors supported by experienced senior management. The proposed Monitor believes that the charge is required and reasonable in the circumstances and also observes that it will not cover all of the directors’ and officers’ liabilities in the worst case scenario. In all of these circumstances, I approved the request.96

94. Cash Store maintains directors’ and officers’ liability insurance (the “D&O

Insurance”) for the directors and officers of the Applicants. The amount of coverage remaining

under the D&O Insurance is approximately $28 million. Given Cash Store’s involvement in

multiple significant litigation proceedings, there is considerable uncertainty about whether this

coverage will be sufficient to cover defence costs for the directors and officers and any potential

findings of liability. In addition, the directors and officers face the usual potential exposure to

employment-related statutory liabilities.97

95 Re Jetsgo Corp., 2005 CarswellQue 2700 (Que. S.C.) at para. 42.

96 Re Canwest Global, supra, at para. 48.


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95. The D&O Insurance will expire in July 2014. Cash Store has already purchased

one year “run-off” coverage to commence upon expiry of the D&O Insurance. Cash Store has so

far been unable to finalize a renewal of the D&O Insurance.98

96. Cash Store’s directors have indicated that, due to the potential for significant

personal liability and the uncertainty surrounding the renewal of the D&O Insurance, they cannot

continue their service and involvement in this restructuring unless the Initial Order includes the

Directors’ Charge. The Directors’ Charge will secure the indemnification obligations owed by

Cash Store to the directors.99

97. The requested Directors’ Charge will be established in an amount that is

reasonable given the nature of the Applicants’ business, the number of employees in Canada and

the corresponding potential exposure of the directors and officers to personal liability.

98. For these reasons, it is submitted that this Honourable Court should grant the

Directors Charge.

G. PROTECTION FROM PERSONAL LIABILITY FOR THE CRO AND SPECIAL

COMMITTEE

99. The draft Initial Order contemplates the appointment of a CRO to act as overseer

of the restructuring. As such, the draft Initial Order provides for certain protections from

personal liability for the CRO in connection with his or her duties and involvement in the

restructuring (the “CRO Protection”).



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100. In addition, the draft Initial Order includes measures that are designed to provide

the same type of protection to the Special Committee against personal liabilities associated with

their role in Cash Store’s restructuring (the “Special Committee Protection”). The Special

Committee has indicated that, given the uncertainty surrounding the availability of the D&O

Insurance after its expiry, the Special Committee intends to resign after the CRO has been

formally appointed by the Court and the Special Committee’s role in the restructuring has been

transitioned to the CRO.100

101. The CRO Protection is typical of similar protections provided to CROs in other

proceedings. In addition, given the uncertain environment in which they are operating, the

Special Committee has indicated that their assistance with the transition to the CRO is

conditional upon obtaining the Special Committee Protection, which recognizes the role that the

Special Committee has played in overseeing the restructuring to this point. As a result, the Initial

Order provides that no member of the Special Committee will have any liability with respect to

any losses, damages or liabilities of any nature or kind from and after the date of the Initial

Order, except to the extent that such damages, losses or liabilities result from the gross

negligence or wilful misconduct of that member.101

102. Effectively, the Special Committee Protection will cover the very brief

“bridging” period between the granting of the Initial Order (if it is approved) and the time when

the CRO formally assumes full responsibilities for overseeing the restructuring and

responsibilities are transitioned from the Special Committee to the CRO.



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103. These measures are justified on the basis that it is commonplace for companies

that are restructuring to appoint a CRO and to protect the CRO from liability as the CRO carries

out his or her duties in connection with the restructuring. In the weeks leading up to the

commencement of this proceeding, the Special Committee has been effectively fulfilling the role

of CRO. Like a CRO, the Special Committee is playing the role of neutral, objective overseer of

the restructuring process.

104. There is ample precedent in CCAA jurisprudence for extending protections from

liability to a CRO of the nature proposed in the draft Initial Order.102 The basis for extending this

protection is similar to the basis for extending similar protections to the Monitor and to directors

and officers of a debtor company. As this Court has stated:

It is hard to imagine how a prospective CRO would be prepared to take on the responsibilities of that position in the context of a situation like the present one, fraught as it is with obvious conflicting interests on the part of the different parties involved and a background of action in the work place and litigation in court, without significant protection against liability.103

105. It is appropriate to extend the same type of specific protections to both the CRO

and the Special Committee in order to mitigate any liabilities to they may be exposed in

overseeing the restructuring for the benefit of all Cash Store’s stakeholders. The Special

Committee Protection is of very limited duration, as it applies only during the “bridging” period

from the time of the Initial Order until the CRO formally assumes his or her responsibilities and

the transition of responsibilities from the Special Committee to the CRO has occurred.

102 See Re Collins & Aikman Automotive Canada Inc. (2007), 37 C.B.R. (5th) 282, 2007 CarswellOnt 7014 (Ont.

S.C.J.) [Collins & Aikman]. See also ICR Commercial Real Estate (Regina) Ltd. v. Bricore Land Group Ltd., 2007 SKCA 72, 2007 CarswellSask 324 (Sask. C.A.) [ICR Commercial Real Estate].

103 Collins & Aikman, supra, at para. 138. A similar rationale was referenced by the trial judge in ICR Commercial Real Estate, supra, which was quoted with approval in the Court of Appeal’s reasons at para. 75. In that case, the Court refused to lift the stay of proceedings to allow a claim for “bad faith” to be asserted against a CRO who was protected by language similar to that proposed in the draft Initial Order.

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Schedule “A”

LIST OF AUTHORITIES

Case Law

1. ICR Commercial Real Estate (Regina) Ltd. v. Bricore Land Group Ltd., 2007 SKCA 72, 2007 CarswellSask 324 (Sask. C.A.)

2. Re Alberta-Pacific Terminals Ltd. (1991), 8 C.B.R. (3d) 99, 1991 CarswellBC 494 (B.C. S.C.)

3. Re Canwest Global Communications Corp. (2009), 59 C.B.R. (5th) 72, 2009 CarswellOnt 6184 (Ont. S.C.J. [Commercial List])

4. Re Canwest Publishing Inc./Publications Canwest Inc., 2010 ONSC 222, 2010 CarswellOnt 212 (Ont. S.C.J. [Commercial List])

5. Re Collins & Aikman Automotive Canada Inc. (2007), 37 C.B.R. (5th) 282, 2007 CarswellOnt 7014 (Ont. S.C.J.)

6. Re First Leaside Wealth Management Inc., 2012 ONSC 1299, 2012 CarswellOnt 2559 (Ont. S.C.J. [Commerical List])

7. Re General Publishing Co. (2003), 39 C.B.R. (4th) 216, 2003 CarswellOnt 275 (Ont. S.C.J.), aff’d 2004 CarswellOnt 49 (Ont. C.A.)

8. Re Jetsgo Corp., 2005 CarswellQue 2700 (Que. S.C.)

9. Re League Assets Corp., 2013 BCSC 2043, 2013 CarswellBC 3408 (B.C. S.C.)

10. Re Skydome Corp. (1998), 16 C.B.R. (4th) 118, 1998 CarswellOnt 5922 (Ont. Gen. Div. [Commercial List])

11. Re Smurfit-Stone Container Canada Inc. (2009), 50 C.B.R. (5th) 71, 2009 CarswellOnt 391 (Ont. S.C.J. [Commercial List])

12. Re Stelco (2004), 48 C.B.R. (4th) 299, 2004 CarswellOnt 1211 (Ont. S.C.J. [Commercial List]), leave to appeal to C.A. refused 2004 CarswellOnt 2936, (Ont. C.A.), leave to appeal to S.C.C. refused 2004 CarswellOnt 5200 (S.C.C.)

13. Re Ted Leroy Trucking [Century Services] Ltd., 2010 SCC 60, 2010 CarswellBC 3419 (S.C.C.)

14. Re Temple City Housing Inc. (2007), 42 C.B.R. (5th) 274, 2007 CarswellAlta 1806 (Alta. Q.B.), leave to appeal to C.A. refused 2008 CarswellAlta 2 (Alta. C.A.)

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Secondary Sources

15. Waters, D.W.M. Law of Trusts in Canada, 4th ed. (Toronto: Carswell, 2012).

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Schedule “B”

BANKRUPTCY AND INSOLVENCY ACT

R.S.C. 1985, c. B-3, as amended

2. [...] “insolvent person” « personne insolvable »

“insolvent person” means a person who is not bankrupt and who resides, carries on business or has property in Canada, whose liabilities to creditors provable as claims under this Act amount to one thousand dollars, and

(a) who is for any reason unable to meet his obligations as they generally become due,

(b) who has ceased paying his current obligations in the ordinary course of business as they generally become due, or

(c) the aggregate of whose property is not, at a fair valuation, sufficient, or, if disposed of at a fairly conducted sale under legal process, would not be sufficient to enable payment of all his obligations, due and accruing due;

COMPANIES’ CREDITORS ARRANGEMENT ACT

R.S.C. 1985, c. C-36, as amended

2.(1) [...] “debtor company” « compagnie débitrice »

“debtor company” means any company that

(a) is bankrupt or insolvent,

(b) has committed an act of bankruptcy within the meaning of the Bankruptcy and Insolvency Act or is deemed insolvent within the meaning of the Winding-up and Restructuring Act, whether or not proceedings in respect of the company have been taken under either of those Acts,

(c) has made an authorized assignment or against which a bankruptcy order has been made under the Bankruptcy and Insolvency Act, or

(d) is in the course of being wound up under the Winding-up and Restructuring Act because the company is insolvent;

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[...]

Application

3. (1) This Act applies in respect of a debtor company or affiliated debtor companies if the total of claims against the debtor company or affiliated debtor companies, determined in accordance with section 20, is more than $5,000,000 or any other amount that is prescribed.

[...]

Interim financing

11.2 (1) On application by a debtor company and on notice to the secured creditors who are likely to be affected by the security or charge, a court may make an order declaring that all or part of the company’s property is subject to a security or charge — in an amount that the court considers appropriate — in favour of a person specified in the order who agrees to lend to the company an amount approved by the court as being required by the company, having regard to its cash-flow statement. The security or charge may not secure an obligation that exists before the order is made.

Priority — secured creditors

(2) The court may order that the security or charge rank in priority over the claim of any secured creditor of the company.

Priority — other orders

(3) The court may order that the security or charge rank in priority over any security or charge arising from a previous order made under subsection (1) only with the consent of the person in whose favour the previous order was made.

Factors to be considered

(4) In deciding whether to make an order, the court is to consider, among other things,

(a) the period during which the company is expected to be subject to proceedings under this Act;

(b) how the company’s business and financial affairs are to be managed during the proceedings;

(c) whether the company’s management has the confidence of its major creditors;

(d) whether the loan would enhance the prospects of a viable compromise or arrangement being made in respect of the company;

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(e) the nature and value of the company’s property;

(f) whether any creditor would be materially prejudiced as a result of the security or charge; and

(g) the monitor’s report referred to in paragraph 23(1)(b), if any.

1997, c. 12, s. 124; 2005, c. 47, s. 128; 2007, c. 36, s. 65.

[...]

Critical supplier

11.4 (1) On application by a debtor company and on notice to the secured creditors who are likely to be affected by the security or charge, the court may make an order declaring a person to be a critical supplier to the company if the court is satisfied that the person is a supplier of goods or services to the company and that the goods or services that are supplied are critical to the company’s continued operation.

Obligation to supply

(2) If the court declares a person to be a critical supplier, the court may make an order requiring the person to supply any goods or services specified by the court to the company on any terms and conditions that are consistent with the supply relationship or that the court considers appropriate.

Security or charge in favour of critical supplier

(3) If the court makes an order under subsection (2), the court shall, in the order, declare that all or part of the property of the company is subject to a security or charge in favour of the person declared to be a critical supplier, in an amount equal to the value of the goods or services supplied under the terms of the order.

Priority


1997, c. 12, s. 124; 2000, c. 30, s. 156; 2001, c. 34, s. 33(E); 2005, c. 47, s. 128; 2007, c. 36, s. 65.

[...]

Security or charge relating to director’s indemnification

11.51 (1) On application by a debtor company and on notice to the secured creditors who are likely to be affected by the security or charge, the court may make an order declaring that all or part of the property of the company is subject to a security or charge — in an amount that the

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court considers appropriate — in favour of any director or officer of the company to indemnify the director or officer against obligations and liabilities that they may incur as a director or officer of the company after the commencement of proceedings under this Act.

Priority


Restriction — indemnification insurance

(3) The court may not make the order if in its opinion the company could obtain adequate indemnification insurance for the director or officer at a reasonable cost.

Negligence, misconduct or fault

(4) The court shall make an order declaring that the security or charge does not apply in respect of a specific obligation or liability incurred by a director or officer if in its opinion the obligation or liability was incurred as a result of the director’s or officer’s gross negligence or wilful misconduct or, in Quebec, the director’s or officer’s gross or intentional fault.

2005, c. 47, s. 128; 2007, c. 36, s. 66.

Court may order security or charge to cover certain costs

11.52 (1) On notice to the secured creditors who are likely to be affected by the security or charge, the court may make an order declaring that all or part of the property of a debtor company is subject to a security or charge — in an amount that the court considers appropriate — in respect of the fees and expenses of

(a) the monitor, including the fees and expenses of any financial, legal or other experts engaged by the monitor in the performance of the monitor’s duties;

(b) any financial, legal or other experts engaged by the company for the purpose of proceedings under this Act; and

(c) any financial, legal or other experts engaged by any other interested person if the court is satisfied that the security or charge is necessary for their effective participation in proceedings under this Act.

Priority


2005, c. 47, s. 128; 2007, c. 36, s. 66.

IN THE MATTER OF the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended AND IN THE MATTER OF a plan of compromise or arrangement of The Cash Store Financial Services Inc., The Cash Store Inc., TCS Cash Store Inc., Instaloans Inc., 7252331 Canada Inc., 5515433 Manitoba Inc., and 1693926 Alberta Ltd Doing Business as “The Title Store”

Court File No:

Ontario SUPERIOR COURT OF JUSTICE

COMMERCIAL LIST

Proceeding commenced at Toronto


OSLER, HOSKIN & HARCOURT LLP P.O. Box 50, 1 First Canadian Place Toronto, ON M5X 1B8

Marc Wasserman LSUC#44066M Tel: (416) 862-4908 Jeremy Dacks LSUC# 41851R Tel: (416) 862-4923 Fax: (416) 862-6666 Counsel to the Special Committee of the Board of Directors of Cash Store Financial Services Inc.

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